Applied Industrial Technologies Q4 2026 Earnings Results & Report

Applied Industrial Technologies EPS Results

• Actual EPS: $3.17
• Consensus EPS: $2.92
• Beat/Miss: Beat by +$0.25
• One Year Ago EPS: $2.80
• EPS Beat Rate: 8 of last 8 quarters

Applied Industrial Technologies Revenue Results

• Actual Revenue: $1.35 billion
• Expected Revenue: $1.29 billion
• Beat/Miss: Beat by +$60.14 million
• YoY Revenue Growth: +10.50%

Applied Industrial Technologies (NYSE:AIT) is a distributor and value-added service provider of industrial products and engineered solutions. The company supplies products used to maintain, repair and operate manufacturing, processing, infrastructure and other industrial facilities, including bearings, power-transmission components, fluid-power equipment, industrial motion products, automation technologies, safety products and related supplies.

In addition to distributing products from leading manufacturers, Applied Industrial Technologies provides technical support, engineering, fabrication, repair and maintenance services. Its solutions are designed to improve equipment reliability, productivity and operating efficiency across industries such as manufacturing, food and beverage, energy, transportation, mining and other industrial markets.

Founded in 1923 and headquartered in Cleveland, Ohio, the company serves customers through a network of locations and sales channels primarily in the United States and Canada, as well as in Australia and New Zealand. Applied Industrial Technologies also operates specialized businesses that provide engineered products and services for applications requiring customized industrial solutions.

Applied Industrial Technologies Q4 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Strong fourth-quarter execution: Organic sales grew 10%, led by 13% growth in Engineered Solutions and 8% in Service Centers. EBITDA increased 16% and EPS rose 13%, with EBITDA margins expanding to 13.1% despite higher LIFO costs.
• Positive Sentiment: Demand momentum continued into fiscal 2027, with quarter-to-date organic sales up approximately 7%, positive order trends, and particular strength in automation, fluid power, technology, and data-center-related activity.
• Positive Sentiment: Applied raised its five-year intermediate objectives to $7 billion in sales and a 14% EBITDA margin, citing operating leverage, productivity initiatives, cross-selling, technology investments, acquisition synergies, and secular industrial automation tailwinds.
• Positive Sentiment: The company ended the year with approximately 0.2x net leverage and nearly $2 billion of balance-sheet capacity, supporting continued share repurchases, dividend growth, capital investment, and potentially greater M&A contribution.
• Negative Sentiment: Fiscal 2027 guidance is relatively cautious, calling for sales growth of 4%–6.5%, EBITDA margins of 12.5%–12.8%, and EPS of $11.65–$12.15. Management cited difficult second-half comparisons, geopolitical and trade-policy uncertainty, inflation, higher interest expense, LIFO costs, and potentially lower free cash flow from increased working-capital investment.

Presentation

[Operator]

Welcome to the fiscal 2026 fourth quarter earnings call for Applied Industrial Technologies. My name is Trevor, and I will be your moderator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you wish to ask a question at that time, please press star followed by the number one on your telephone keypad. Prior to asking a question, lift your handset to ensure the best audio quality. If at any time during the conference call you need to reach an operator, please press star zero. Please note that this conference is being recorded. I will now turn the call over to Ryan Cieslak, Vice President of Investor Relations and Treasury. Ryan, you may begin.

[Ryan Cieslak, VP of Investor Relations and Treasury at Applied Industrial Technologies]

Okay. Thanks, Trevor, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our fourth quarter results. Both of these documents are available in the Investor Relations section of applied.com. Before we begin, just a reminder, we will discuss our business outlook and make forward-looking statements. All forward-looking statements are based on current expectations, subject to certain risks and uncertainties, including those detailed in our SEC filings.

[Ryan Cieslak, VP of Investor Relations and Treasury at Applied Industrial Technologies]

Actual results may differ materially from those expressed in the forward-looking statements. The company undertakes no obligation to update publicly or revise any forward-looking statement. In addition, we will use non-GAAP financial measures during the conference call, which are subject to the qualifications referenced in our SEC filings. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer, and David Wells, our Chief Financial Officer. With that, I will turn it over to Neil.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I will begin today with perspective and highlights on our results, including an update on industry conditions and expectations going forward, as well as provide an overview of our new intermediate financial targets. Dave will follow with more financial detail on the quarter's performance and provide additional color on our fiscal 2027 guidance. I will then close with some final thoughts. Overall, we reported a solid finish to fiscal 2026, with record fourth quarter sales and earnings that exceeded our expectations. The quarter was underscored by organic sales growth of 10%, which was the strongest in more than three years, and a notable improvement from the 6% growth we reported last quarter.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

We levered the stronger growth very well, expanding EBITDA margins by more than 60 basis points to over 13%, growing EBITDA by 16% and EPS by 13% compared to the prior year, which is inclusive of ongoing LIFO expense headwinds. In total, these were strong results to end a year that was both defining and pivotal on many fronts, including showing strong evidence of our operating durability, as well as early signs of the significant growth potential taking shape across our business. I want to thank our Applied team for their ongoing execution. The focus drove another year of exceeding our commitments and creating meaningful value for our customers, suppliers, and all stakeholders, further validating the power of our collective efforts and differentiated industry position. Several key points to highlight in more detail. First, underlying demand improved across both segments during the quarter.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Trends strengthened through the end of the quarter, with organic sales increasing over 10% year-over-year in June, despite more difficult comparisons. The stronger sales growth was volume driven, reflecting greater technical MRO and capital spending activity, combined with ongoing benefits from our internal sales initiatives and industry position. Strengthening underlying demand was apparent in year-over-year trends across our top 30 end markets, where 20 generated positive sales growth compared to 17 last quarter and 15 in the prior year quarter. Growth was strongest across metals, technology, utilities and energy, machinery, rubber and plastics, and pulp and paper. This was partially offset by declines primarily in chemicals, lumber and wood, and transportation. Sales growth during the quarter was led by our Engineered Solutions segment, which delivered 13% organic sales growth year-over-year, up from 9% last quarter.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

During the quarter, we saw stronger demand across legacy and emerging customer verticals, as well as solid backlog conversion. Segment order trends also remained positive during the quarter, increasing by a double-digit percent year-over-year for the third straight quarter. Sales growth in the quarter was strongest in automation, where organic sales increased over 20% year-over-year. This was the strongest organic growth in over four years, underscoring the solid demand developing for our automation solutions as the adoption of robotics, machine vision, and digital technologies ramps higher with more productive capital spending environment. Growth also strengthened across our industrial and mobile fluid power operations, where sales increased by a high single-digit percent over the prior year. Demand is improving across many of our legacy Fluid Power markets, including construction, metals, and machinery.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

In addition, our engineering project funnel is expanding as OEM customers increasingly focus on upgrading fluid power systems and integrate new advanced features into their mobile equipment. Our fluid power performance is also benefiting from Hydradyne, which, as you recall, we acquired 18 months ago. We have made tremendous progress across our synergy work streams, and contribution from Hydradyne improved throughout fiscal 2026. Of note, the second half of fiscal 2026, Hydradyne sales increased by a double-digit percent year-over-year, while their EBITDA margins improved over 200 basis points. In addition, segment performance during the quarter benefited from strong technology vertical contribution, including favorable growth across the semiconductor space, as well as new business continuing to develop around data centers.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

As a reminder, our technology vertical represents over 15% of our Engineered Solutions segment today, with related participation across all three areas of the segment, including automation, fluid power, and flow control. Our service center segment also had a solid quarter. Organic sales growth of 8% accelerated from 4% last quarter, with average daily sales up approximately 5% sequentially and ahead of normal seasonality for the second straight quarter. Greater break fix and technical MRO activity continued to broaden throughout the quarter. Of note, 27 of our top 30 industry verticals were up year-over-year in our U.S. service center network during the fourth quarter, with notable strength across metals, pulp and paper, rubber and plastics, and utilities and energy. Growth was strongest across national strategic accounts, where sales continued to benefit from our internal initiatives and one Applied value proposition.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

We also saw demand strengthen across small and mid-size local accounts, where sales increased by a high single-digit percent year-over-year during the quarter, providing further evidence of the recovery taking shape across the industrial sector. It is also worth noting the service center segment's performance throughout fiscal 2026. Despite more mixed end-market demand to start the year, segment sales grew organically year-over-year, every quarter in fiscal 2026. Total sales finished up nearly 6%, while EBITDA grew 8%, inclusive of greater LIFO expense. Looking at the segment's performance over the past five years, organic sales growth has averaged 8%, while EBITDA growth has averaged 13%. Overall, this is notable performance that highlights a stronger and more durable growth profile that exists across our service center segment today, reflecting benefits from internal initiatives as well as secular and structural tailwinds positively impacting our core market position.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Overall, a solid quarter highlighting continued positive top-line momentum building across Applied. At the same time, our team remains focused on driving stronger returns as this more favorable growth backdrop continues to develop. We saw solid evidence of this during the quarter, where we levered 10% sales growth into 16% EBITDA growth, representing incremental margins of over 19%, or more than 22% when excluding LIFO expense. We also had a strong quarter of free cash generation, which increased 16% over the prior year. Free cash totaled $461 million in fiscal 2026, which was down modestly over the prior year, despite greater working capital requirements to support growth in the back half of the year.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Ongoing initiatives and system investments continue to optimize our working capital KPIs, including areas of accounts receivable and inventory management, with net working capital as a percent of sales ending fiscal 2026 at a six-year low. Moving forward, we remain well positioned to drive stronger earnings growth and solid cash generation with ongoing support from our internal initiatives and mixed tailwinds. From a capital deployment standpoint, we had another productive year in fiscal 2026, deploying approximately $425 million on share buybacks, dividends, CapEx, and M&A. Over the past two years, related capital deployment totaled just under $1 billion. In fiscal 2026, we were more active with share buybacks, repurchasing a total of 1.2 million shares for $317 million. We also increased our quarterly dividend by 11% and continued to invest in our technology platforms, distribution centers, and growth capacity during the year.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

We expect to remain active with capital deployment in fiscal 2027 with nearly $2 billion of balance sheet capacity. As always, we will remain disciplined with a focus on deploying capital that enhances our scale, growth profile, and competitive position going forward. M&A remains a top priority, and we continue to actively evaluate various targets across both our segments. Lastly, I'd like to take a moment to provide some initial thoughts on our fiscal 2027 outlook, as well as our intermediate financial objectives, which we increased this morning. Dave will provide greater detail on our guidance assumptions, but overall, we enter fiscal 2027 with solid growth potential and operational momentum developing across both our segments. Positive sales momentum has continued into the first quarter, with organic sales to date up approximately 7% compared to prior year levels.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

End market demand in aggregate appears to be on solid footing, with limited pockets of weakness or signs of slowing near term. Broader macro indicators, including ISM, industrial production, and durable goods orders, continue to trend favorably. In addition, following a more muted growth backdrop in fiscal 2026, we expect potentially greater contribution from higher margin flow control sales in fiscal 2027 as MRO and project activity across process end markets improve following a greater level of deferred spending this past year, particularly in chemicals and refining verticals. We remain mindful of the evolving geopolitical backdrop and trade policy uncertainty, both of which could impact the cadence and trajectory of end market growth, depending on how things develop. We will also face more difficult comparisons, most notably in the second half of the year, following our recent strong performance. These considerations are contemplated in our initial fiscal 2027 guidance.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Beyond critical and core end market dynamics, we expect ongoing positive contribution from our internal sales initiatives, including greater cross-selling momentum and benefits from sales productivity investments. We also expect structural and secular tailwinds to remain positive and potentially more impactful factors to our demand moving forward. Of note, our ongoing evolution has positioned Applied at the intersection of exciting and powerful growth trends tied to rising technical support at customer plants, industrial system upgrades, automation adoption, including physical AI integration, and the build-out of critical infrastructure across both legacy and emerging customer verticals. Our related exposure to these trends is high given our industry position supporting U.S. manufacturing and deep technical knowledge of our customers' facilities, as well as greater scale we have today in areas of advanced automation and fluid power.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Further, our balance sheet and cash generation provide meaningful capacity to further compound our growth through ongoing M&A. As I mentioned earlier, our pipeline remains active, and we believe M&A contribution could be more meaningful to our sales growth through fiscal 2027 and beyond as we further execute our strategy. The M&A backdrop is increasingly productive as targets face heightened competition, required operational investments, and extended ownership life cycles. Our acquisition track record, including more than 18 transactions since 2018, combined with our leading technical solutions platform, makes us a compelling home for the companies we are currently evaluating. We see many catalysts and tailwinds supporting our ongoing growth across Applied as we enter the next phase of our evolution. At the same time, we have great potential to further expand our EBITDA margin profile moving forward.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Our business model provides inherent operating leverage, and we continue to target mid to high teen incremental EBITDA margins at mid-single-digit organic sales growth. The ongoing expansion of our Engineered Solutions segment and local account growth across our service centers provide durable and structural mixed tailwinds that should intensify in a more favorable demand environment. We also see opportunities to further optimize our productivity and operating leverage through ongoing technology investments, expanding our shared services model, and leveraging AI. While ongoing synergy progress across recent acquisitions, including Hydradyne, provide further margin support. The opportunity ahead is exciting and one that has been built through compounding years of executing our strategy, committing to continuous improvement, leveraging our differentiated industry position, and adhering to a disciplined approach to capital investment.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

From various organic investments and positioning made across our core service center segment to strategic moves into flow control and automation, our strategy has driven intentional transformation across our business to serve customers more completely, expand our market potential, and strengthen our overall value proposition. Our historical performance provides strong evidence of the power of our strategy and potential. In the past five years, we've grown sales by 9%, EBITDA by 14%, EPS by 18%, and free cash flow by 15% on a compounded annual basis. Over the same period, gross margins have expanded 120 basis points and EBITDA margins have expanded by over 260 basis points, while our return on capital metrics have improved notably.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Considering these dynamics, we believe now is the opportune time to update our intermediate financial targets, including increasing our sales objective to $7 billion from $5.5 billion prior, and increasing our EBITDA margin objective to 14% from 13% prior. We believe these objectives are well within the company's capability and can be achieved over the next five years, depending on broader macro conditions, the cadence and scope of M&A, and other factors. Overall, our team is now engaged and ready to execute on these next milestones, which we believe provides the framework for significant value creation for all stakeholders moving forward. At this time, I'll turn it over to Dave for additional detail on our results and outlook.

[David Wells, CFO at Applied Industrial Technologies]

Thanks, Neil, and good morning to everyone joining today. Just another reminder before I begin, as in prior quarters, we have posted a supplemental investor presentation to our investor site for your additional reference. We hope that you will find this to be a useful resource as we recap our most recent quarter performance and initial fiscal 2027 guidance. Turning now to our financial performance in the quarter, consolidated sales increased 10.4% over the prior year quarter. Acquisitions and foreign currency were a modest tailwind in the period, adding 30 and 40 basis points, respectively, of growth. The number of selling days in the quarter was consistent year-over-year. Netting these factors, sales increased 9.7% on an organic basis.

[David Wells, CFO at Applied Industrial Technologies]

As it relates to pricing, we estimate the contribution of product pricing to year-over-year sales growth was approximately 250 basis points in the quarter, which was above our guidance of 200 basis points. Netting this impact, we estimate volumes grew approximately 7% over the prior year, a nice acceleration from the March quarter volume growth of 3.5%. Moving to consolidated gross margin performance, as highlighted on page eight of the deck, gross margins of 30.4% was down 20 basis points compared to the prior year level. During the quarter, we recognized LIFO expense of $6.4 million compared to $2.9 million in the prior year quarter and $5.6 million last quarter. On a net basis, this resulted in an unfavorable 26 basis point year-over-year impact on gross margins.

[David Wells, CFO at Applied Industrial Technologies]

Excluding LIFO expense, gross margins were up modestly year-over-year, reflecting ongoing progress with our internal margin initiatives as well as price and channel execution. As it relates to our operating cost, selling, distribution, and administrative expenses increased 5.1% compared to prior year levels. On an organic constant currency basis, SG&A expense was up 4.3% year-over-year. As a percentage of sales, SG&A expense improved 94 basis points year-over-year to 18.6%, highlighting strong operating leverage in the quarter and a solid improvement from trends last quarter. Our teams continue to remain disciplined on spend while also focusing on various efficiency initiatives tied to technology investments, shared services, and sales productivity tools. This helped offset continuing inflationary headwinds, higher incentives, and ongoing growth investment in the business during the quarter.

[David Wells, CFO at Applied Industrial Technologies]

Overall, stronger organic sales growth, combined with steady gross margin performance and solid cost leverage, resulted in reported EBITDA increasing 16.1% over the prior year. This is inclusive of greater LIFO expense year-over-year, which negatively impacted EBITDA growth by 2.3 percentage points compared to the prior year quarter. Reported EBITDA margin of 13.1% was up 64 basis points from the prior year level, with year-over-year LIFO headwinds negatively impacting EBITDA margin by 26 basis points. EBITDA margins exceeded our fourth quarter guidance range of 12.6%-12.8%, primarily reflecting more favorable cost leverage on stronger sales growth in the quarter. Reported earnings per share of $3.17 increased 13.2% from prior year EPS of $2.80. On a year-over-year basis, EPS was impacted by a higher tax rate and net interest expense, partially offset by a lower diluted share count.

[David Wells, CFO at Applied Industrial Technologies]

Turning now to our performance by business segment, as highlighted in slides nine and 10 of the presentation, sales in our service center segment increased 7.9% year-over-year on an organic basis. This excludes 50 basis points of contribution from acquisitions and a positive 60 basis point impact from foreign currency translation. Improved organic sales growth was primarily driven by stronger volume growth across our U.S. service center operations, reflecting more favorable end market demand and benefits from our internal sales initiatives, and to a lesser extent, improved volume growth across our international operations. Segment EBITDA increased 16.3% over the prior year, while segment EBITDA margin of 14.5% expanded 91 basis points.

[David Wells, CFO at Applied Industrial Technologies]

This year-over-year improvement primarily reflects favorable operating leverage on stronger sales growth, combined with solid channel execution and cost control, which more than offset ongoing inflationary headwinds, including greater LIFO expense compared to the prior year level. Within our Engineered Solutions segment, sales increased 12.9% over the prior year quarter on an organic basis. The year-over-year increase was primarily driven by double-digit growth across our automation and fluid power operations, reflecting solid backlog conversion, improving end market demand, and positive technology vertical contribution. This was partially offset by muted sales growth across our flow control operations, primarily reflecting a more difficult prior year comparison, coupled with softer MRO activity across various process end markets during the quarter. Segment EBITDA increased 15.8% over the prior year, or approximately 19% when excluding LIFO expense.

[David Wells, CFO at Applied Industrial Technologies]

In addition, segment EBITDA margin of 15.1% expanded 38 basis points from prior levels, inclusive of a 44 basis point year-over-year LIFO headwind. The strong EBITDA growth and EBITDA margin performance in the quarter primarily reflects solid underlying incremental margins on more robust sales growth, combined with ongoing cost accountability, partially offset by muted flow control sales growth in the quarter. Moving to our cash flow performance. Cash generated from operating activities during the fourth quarter was $165 million, while free cash flow totaled $159.7 million, representing conversion of approximately 135% relative to net income. Compared to the prior year fourth quarter, free cash was up nearly 16%, reflecting stronger earnings and ongoing benefits from our working capital initiatives. From a balance sheet perspective, we ended June with approximately $127 million of cash on hand and net leverage at 0.2x EBITDA.

[David Wells, CFO at Applied Industrial Technologies]

Our current revolving credit agreement has approximately $826 million of available capacity and an additional $800 million accordion option. Combined with incremental capacity under our AR securitization facility, we have significant financial capacity to support our capital deployment initiatives moving forward, including accretive M&A, dividend growth, and share buybacks. During the fourth quarter, we repurchased over 265,000 shares for $81 million. Turning now to our outlook, which is detailed on page 13 of the presentation, we are establishing full-year fiscal 2027 guidance, including EPS in the range of $11.65-$12.15, based on sales growth of 4%-6.5% and EBITDA margins of 12.5%-12.8%. Our outlook takes into consideration ongoing economic uncertainty tied to current geopolitical and trade policy dynamics, as well as lingering inflationary pressures.

[David Wells, CFO at Applied Industrial Technologies]

At the midpoint of guidance, we assume stronger organic sales growth in the first half of the year based on current underlying market conditions, followed by more modest growth rates in the back half of the year, reflecting more difficult comparisons as well as more muted market growth assumptions, pending greater clarity on how macro and trade policy dynamics develop later in the year. While we are positive on current demand conditions and our market condition entering fiscal 2027, we believe a prudent approach to our market growth rate assumptions remains warranted at this time, considering the inherent risk and dynamic nature of current geopolitical and trade policy dynamics, which in totality represent a still somewhat unprecedented operating backdrop. Guidance also assumes 150-200 basis points of year-over-year sales contribution from pricing. Guidance does not assume contribution from future acquisitions or share buybacks.

[David Wells, CFO at Applied Industrial Technologies]

In addition, based on quarter-to-date sales trends through mid-August and our near-term outlook, we currently project fiscal first quarter organic sales to increase by 6%-8% versus the prior year quarter. Our guidance also assumes fiscal first quarter EBITDA margins within the range of 12.3%-12.4%. From a margin and cost perspective, guidance assumes ongoing inflationary pressures and growth investments as well as higher LIFO expense in fiscal 2027 versus 2026. That said, we expect a year-over-year increase in LIFO expense to be more modest in fiscal 2027, following the notable increase we saw in fiscal 2026, combined with more balanced supplier price increases relative to last year. In addition, the midpoint of our full-year guidance assumes incremental EBITDA margins that are within our targeted range of mid-to-high teens.

[David Wells, CFO at Applied Industrial Technologies]

Lastly, we expect free cash generation to remain strong in fiscal 2027, but to potentially trend lower year-over-year, reflecting greater working capital investment to support our growth opportunities. In addition, we expect ongoing organic investment supporting our strategy and technology investments, with capital expenditures targeted in a $35 million-$40 million range for fiscal 2027. With that, I will now turn the call back over to Neil for some final comments.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

As we begin fiscal 2027, we are encouraged by the ongoing positive sales momentum. The recovery taking shape across the industrial sector appears durable near term, with customers operating at higher production levels and increasing capital spending in support of a growing manufacturing backdrop across North America, including clear secular tailwinds gaining traction. Our initial guidance for fiscal 2027 incorporates a steady and favorable growth backdrop in the first half of the year, and in more prudent assumptions in the back half, as we take into consideration the short cycle nature of our business, more difficult comparisons, and limited visibility in how current trade policy and geopolitical dynamics might develop as the year progresses. That said, current market conditions and sustained order momentum leave us positively biased, and we continue to have many self-help opportunities to positively influence our performance above and beyond underlying market growth.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

In addition, as highlighted by the increase to our intermediate financial objectives, we enter fiscal 2027 with the strongest market position in Applied's history, and with strategic initiatives that present a path to deliver meaningful earnings growth over the next five years. Overall, our track record highlights the power of our strategy and value creation potential, and we're extremely motivated and engaged based on what we believe lies ahead. With that, we'll open up the lines for your questions.

[Operator]

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please pick up your handset, press star, followed by the number one on your telephone keypad. If you would like to withdraw your question from the queue, press star one again. As a reminder, if at any time you need to reach an operator, please press star zero. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Christopher Glynn with Oppenheimer & Company. Christopher, your line is open.

[Christopher Glynn, Analyst at Oppenheimer & Company]

Thanks. Good morning, everyone. It was just a kind of curiosity question for us. The CapEx is almost 50% higher than the average the past several years. Just curious if anything is particularly causing that or just keeping up with growth?

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah. We are coming off a year, it is not a capital-intensive business as you know, Chris, but see some opportunities that are in flight, both in terms of some organic investment to further our footprint across some of the automation business, for example, some technology, further technology investments. No big, heavy single hitters there, but just some organic investment, continue to focus on both efficiencies and organic growth opportunities in the business. Stepping up as part of our capital deployment, that CapEx a bit to see some of those opportunities that we see in front of us.

[Christopher Glynn, Analyst at Oppenheimer & Company]

Great. Makes sense. It is nice to see the environment more enabling to show up the virility of the business model. In that vein, you talked about some initiatives taking hold. I am curious, in automation, are those key applications, I know they have plenty of runway, but anything really standing out among the vision, digitization, robotics? Are there any new categories you want to feature there that might roll into the fold near term? Also in the initiatives bucket, you talked about increasing cross-selling momentum, so maybe go into that a bit.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Sure. I can start, Chris. I think first across automation, they are active and continue to participate in technology. You think about semi, wafer fab equipment, and data center, that is good. Also food and beverage, we are doing more with productized solutions that can help in robotics and autonomous mobile robots through facilities, as well as vision systems in and around consumer packaging and goods. We are also helping with some solutions around strategic inventory management, where vision systems can play into there. We think the setup and the industry outlooks around robotics and collaborative robots is strong for years ahead. I think we are finding really good applications and developing those on the vision side.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

We will continue to look at what else is important in rounding out. We have got good digital solutions, user interface. We are helping customers as they think about AI, putting things in place in their facilities that help that with robotics and vision, and get returns for them in that front. We think we have a good mix. We will continue to evaluate on that front. Then, just broader initiatives, I think, across the group on cross-selling. I am still encouraged with the team's engagement on that. Good pipeline of opportunities. We are seeing an increased number of customers looking to us as we know they are operating facilities so well that we can help them with advancements in fluid power systems, robotics, and vision, and we are even seeing more opportunity around services and repair in pumps and valves with our flow control business.

[Christopher Glynn, Analyst at Oppenheimer & Company]

Great. If I could sneak in a final one. I understand the mid-high teens incremental margin long-term framework. You did put up a 22% underlying in the quarter. You had maybe three years of kind of flattish end market environments. You are clearly out of that right now. Is there an opportunity where that could stay in the 20% range like you had underlying in the fourth quarter?

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Well, go ahead.

[David Wells, CFO at Applied Industrial Technologies]

You have seen that potential, obviously, as you know, the guidance does assume some slightly higher LIFO expense on a year-over-year basis. We finished FY 2026 at $21.5 million. Guidance assumes $24 million-$28 million. I would say the biggest wild card, to your point, Chris, would be LIFO expense and what that does in terms of the P&L. If you strip that away, nice performance. We have shown the ability to, all things being equal, deliver 20%+ even in incrementals. That potential is there. I think that is the biggest wild card in my mind because the team has done a nice job, as you saw in the most recent quarter of continuing to grow that underlying gross margin profile and control SG&A.

[Christopher Glynn, Analyst at Oppenheimer & Company]

Great. Thanks, guys.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

You bet.

[Operator]

Our next question comes from the line of David Manthey with Baird. David, your line is open. A reminder to unmute yourself if you are muted locally. Thank you.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Maybe we move to the next?

[Operator]

Moving to the next question. Our next question comes from the line of Ken Newman with KeyBanc Capital Markets. Ken, your line is open.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Good morning, guys. Nice quarter.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Hey, Ken.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Maybe for my first question here, it was nice to see a pretty solid order growth of, I think you said 20% year-over-year in your automation business this quarter. Neil, curious if you expect any kind of impacts from this recent FCC ban on foreign robotics imports. I am assuming it is pretty low, but maybe can you remind us how much of the automation business is exposed to products impacted by the ban? And curious if that provides either a catalyst for pricing or share gains just relative to the new automation project integration.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah, I'd say to date, the assessment is it is pretty low into that front. Business, to your point, continues to operate very well. Incoming orders are strong. Our work on applications in those targeted verticals as well as some cross-selling opportunity remains good. At this point, I think it's smaller.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Okay. That's helpful. I also was geared towards your comment, Neil, on M&A potentially driving some stronger contributions to revenue growth this year. I know it's not included in your guidance, but maybe any color just on what you're seeing in the change in activity in the M&A pipeline. I'm curious if there's a way to kind of frame up what some of these targets could look like from a revenue or a margin perspective, if that's something you can talk to.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah, it'd be harder to put it to specific revenues in that. We continue to be active, and you think about things like Hydradyne and midsize potential, and naturally across both segments of the business, there can be some smaller bolt-ons, and then there are perhaps a few larger properties that I think we'll either evaluate or look at coming to market over a period. Do those impact into 2027 or not? Really to be determined, but I think it is a good environment from an M&A standpoint.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

We continue to operate with clear priorities and evaluate things that can be additive to our Engineered Solutions across fluid power, flow control, and automation, as well as augment our service center presence and performance into that. So a good activity in front. We're a believer in helping ourselves as we go through that. We know what priorities matter. We know good prospects, good targets, and those dialogues and exchanges continue.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Very helpful. Thanks.

[Operator]

Our next question comes from the line of Andrew Obin with Bank of America. Andrew, your line is open.

[Andrew Obin, Analyst at Bank of America]

Yeah. Good morning. Can you hear me?

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yes.

[Andrew Obin, Analyst at Bank of America]

Yeah. Just maybe a question. Can you just talk about the daily activity, average daily sales throughout the quarter, and what are you seeing in August?

[David Wells, CFO at Applied Industrial Technologies]

Yeah. Kind of trending across the quarter in terms of organic growth. We had April at 10%, May pulled back just a bit to 8%, June finished up 10% again organically. So two-year stack at a very nice level as we closed out the quarter. Quarter-to-date, we have seen, talked about 6%-8% expectation in terms of organic sales growth. Quarter-to-date, we're trending at about 7%. So, right in line with expectations, Andrew.

[Andrew Obin, Analyst at Bank of America]

Excellent. Thank you. Yeah, sorry.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah. I was just going to add, we think about July. We saw good continued positive order momentum in July, so that's encouraging. The Engineered Solutions segment really up mid-20% into that, so automation continuing. Saw some good order input on process flow control FCX, so that's encouraging, right? We talked about a little bit in the remarks, expecting more to come from customers inside. Fluid Power continuing at a good rate into the 20% as well. So, backlog up year-over-year, sequentially improved when it's usually flat from a seasonality standpoint. Book-to-bill encouraging as well. So, good intake from a July standpoint.

[Andrew Obin, Analyst at Bank of America]

Just maybe a follow-up on the same thing. As things continue to improve, how are you thinking about restocking? Maybe in Fluid Power, maybe Valves and Controls. How do you think about, given the demand is coming up, sorry, Process Automation, Fluid Power, how do you think about potentially restocking into this growing demand? Thank you.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah. I think overall, we do a very good job. Obviously, we're connected with the suppliers in that. Given our mobile OEM presence into that and connectivity and also some industrial and service and repair, and then on the technology space, I think predominantly we're in line. We say often we do not have great stocking nor de-stocking in that as we relate to customers. Probably the differing point being on some of these mobile OEM side of it. I think that strong kind of high single-digit growth, the continued positive look at orders on that can potentially turn into greater demand for us, greater stocking levels than for our key suppliers as well.

[Andrew Obin, Analyst at Bank of America]

Thank you very much.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Okay.

[Operator]

Our next question comes from the line of Chris Dankert with D.A. Davidson. Chris, your line is open.

[Chris Dankert, Analyst at D.A. Davidson]

Hey. Morning, guys. I guess to kind of pull the thread on the ES order growth. I mean, up 20% or mid-20%, pretty impressive. Normally, that stuff books and turns fairly quickly. So maybe can you kind of help put that order growth in the context of the guide? What are we expecting for ES growth in the first quarter? I assume still double digits, but maybe just kind of put ES growth in context for the first quarter and the full-year.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah, I can start on the order side, Chris. I do not know that all of those turn so quickly, right? They can be related to projects even in flow control that can have a sequence in that. If we think about the guide in the quarter, I would expect Engineered Solutions to perhaps be higher and then the service centers perhaps moderate a little bit as we work through. Obviously, it will play out into the quarter. But I think that informs the guide that we have for the first quarter in that. But those Engineered Solutions orders, some of those fit into other customer requirements or timing which dictates that. Are they a quarter out or are they two quarters out? Or perhaps a little longer, right? We will see.

[Chris Dankert, Analyst at D.A. Davidson]

Got it. That is incredibly helpful. Thank you. I guess more of a high level question. You guys have been kind of working some of these internal cost optimization workflows for over a decade now. A lot of opportunity. I guess, where are you focused today and kind of how long is that runway? Is it evergreen? Maybe just kind of update us on what we are actually executing on in terms of cost optimization internally.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah. I think there is an evergreen opportunity around continuous improvement, and we have got a good history of cost accountability. As we look and think about use of technology in our business, I think that helps us in back office efficiencies and we can have more resources forward-facing and engaging with customers. I think a shared services opportunity is still in front of us with opportunity, especially across our Engineered Solutions businesses in that which can be. Just plus other good ongoing continuous improvement of the side. I am encouraged by some of the things that we are looking at that can take out slowing queues with the use of technology and AI as we think about data, as we think about customer portals. I think in time, some of those even further can support growth efficiencies as well.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

We continue to have a good history and a good pipeline of projects about how to continue to be cost-effective, because I think as we scale and grow, there is the opportunity for us to do that with similar resources and perhaps more forward-facing and engaging with customers in those market opportunities.

[Chris Dankert, Analyst at D.A. Davidson]

Well, thanks so much. That certainly makes sense in the context of the medium-term update. Thanks so much and best of luck into the new year, guys.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Thank you.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Thanks. Yeah, Chris.

[Operator]

Our next question comes from the line of David Manthey with Baird. David, your line is open.

[David Manthey, Analyst at Baird]

Thank you. Good morning, guys. I do not want to split atoms here, but when I look at the declining segments, refining came out. It does not mean it is not still flat or negative, but chemicals remains the first industry that is named there. I am wondering if you could talk about trends you are seeing in process industries and maybe the day-to-day maintenance business and the outlook for turnarounds over the next several months.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

Yeah, so if I think about chemicals, and you are right, we think about it in process flow control, down low single digit into that, stable to the last quarter. We touched on July orders. I think about turnarounds and service work, especially in chemicals and refining, have the potential to improve and contribute as we go through the fiscal year, including in the first half. But it has been a bit of a headwind in those sides. But we think that service and that repair, those turnarounds are work that is going to have to be done as some of that was deferred out from a year ago.

[Ryan Cieslak, VP of Investor Relations and Treasury at Applied Industrial Technologies]

Yeah, Dave, I just would add, I think the encouraging both sales growth as well as order growth that we saw out of our flow control business in the month of July, which again, is sort of a good indication that is some of those process and markets starting to recover here into early fiscal 2027, following what had been a little bit of a softer backdrop that we saw throughout 2026.

[David Manthey, Analyst at Baird]

Yeah, that is good to hear. And then, Dave, on the guidance, $12 million-$13 million for interest expense seems a little high based on sort of where we are. I just wondered if you could walk through the rationale behind that level of guidance.

[David Wells, CFO at Applied Industrial Technologies]

Yeah, a couple things that play into that, Dave. The interest rate swap we had in place has rolled off, which gives us more flexibility in deploying capital to pay down further debt if we so desire. Part of it is the function of some of the assumptions around increased rates yet and lower cash balances where we are kind of offsetting and earning interest income that nets against that interest expense as we continue to deploy capital for both M&A, share buyback, and our other capital allocation priorities. Really all three of those factors play into that scenario that drive up the interest expense on a year-over-year basis. That hedge rolled off really around Q3 of last year, so you are seeing only a half year where we had some of that benefit of the interest rate swap hedge in the 2026 results.

[David Manthey, Analyst at Baird]

Got it. Okay. Thank you.

[David Wells, CFO at Applied Industrial Technologies]

You bet.

[Operator]

At this time, we have no further questions. I will now turn the call over to Mr. Schrimsher for any closing remarks.

[Neil Schrimsher, President and CEO at Applied Industrial Technologies]

I just want to thank everyone for taking the time to join us today, and we look forward to talking with you throughout the quarter. Thank you.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Participants

Executives

• Ryan Cieslak, VP of Investor Relations and Treasury
• Neil Schrimsher, President and CEO
• David Wells, CFO

Analysts

• Christopher Glynn, Analyst at Oppenheimer & Company
• Ken Newman, Analyst at KeyBanc Capital Markets
• Andrew Obin, Analyst at Bank of America
• Chris Dankert, Analyst at D.A. Davidson
• David Manthey, Analyst at Baird